All posts tagged Euro Zone

European equity markets opened unchanged Friday, with investors choosing to sit on their hands ahead of the Bundestag’s vote on the latest Greek aid package, while the country’s upcoming debt buyback also weighed on sentiment.

That said, the City’s number crunchers have been as busy as usual. Here’s our pick of today’s broker notes, with the focus on luxury goods, house building and euro-zone growth.

Goldman Sachs busied itself with European luxury stocks. It said the luxury goods sector is mid-way through a multi-year expansion, driven by a rapidly growing market. China is still in “take-off” mode and will soon move into a growth phase, similar to Japan in the 1970s and 1980s.

GS analysts downgraded Hugo Boss and Tod’s because of their high exposure to apparel, wholesale and the domestic European market which the brokerage see as impediments to further outperformance. However, it raised LVMH to “buy” saying it’s among the best positioned in the luxury sector to generate high sustainable returns on capital through growth, high margins and dominant market positions.

Sterling will be lucky if it gets a bronze medal, much less a gold one.

For the last couple of months the pound has been doing fairly well in the currency games, benefiting as a safe haven away from the troubled euro and attracting support as the currency of a country pursuing fiscal discipline.

However, after news this week that the U.K. economy has slipped back into a nasty double dip recession, sterling is hardly likely to end up on a winning podium.

On the contrary, economic evidence suggests that the U.K. is even more exposed to the problems of the euro zone than originally thought.

And now, as the economy contracts at an even more rapid pace than expected, the government will come under even more political pressure to abandon its budget cutting targets.

Our colleagues at Financial News have been busy compiling the list of the most influential people in the European capital markets. And for the second year running, Mario Draghi has come out on top.

As president of the ECB, the highest level non-governmental EU body, Mario Draghi is front and center of the euro zone crisis, and in his role as chairman of the European Systemic Risk Board, he influences financial regulation across the region.

The overhaul of financial regulation since the crisis of 2008, not to mention scandals since then, is approaching a crescendo as transformative pieces of legislation reach the final stages of implementation. So, it is not surprising that this year’s FN100, the eighth annual list, is dominated by regulators and those negotiating with rulemakers on behalf of their industries.

While the overall list is not ranked, we have assessed the relative levels of influence in the 10 categories: regulators, investment bank chiefs, investment banking, capital markets and advisory, sales and trading, market infrastructure, asset management, pensions, hedge funds and private equity.

We have also drawn up an overall top 10. As well as Mr. Draghi, there are another three regulators in the top 10: Stefan Ingves, the chairman of the Basel Committee on Banking Supervision; Mervyn King, the governor of the Bank of England who is preparing the Old Lady of Threadneedle Street for its new role overseeing financial institutions; and Michel Barnier, the European commissioner for internal market and services under whose watch a slew of new rules are being implemented.

Prime central London property prices have risen to fresh highs in recent years as–among other factors–many overseas investors view it as a safe-haven investment, particularly amid the tumultuous debt crisis currently sweeping across the euro zone.

But, what goes up can also come down.

A report, published Thursday by property investor firm Development Securities and conducted by global macroeconomics and financial markets consultancy Fathom Consulting, shows that while uncertainty and economic weakness in the euro zone has helped to boost prices of prime central London property in recent years, a complete breakup of the euro zone could lead to a drop of as much as 50% in prime London property prices.

“Initially, a euro-zone breakup may mean an increase in safe-haven flows to London,” said Matthew Weiner, executive director of Development Securities. “Once each country reverts back to its own currency, however, sterling will strengthen and global equities will fall meaning alternatives across Europe will become more attractive to investors.”

The global growth picture has improved gradually since the start of the year. The U.S. economy is finally expanding again and commodity prices are on the rise. Even many emerging markets, be they in Latin America or Asia, are steaming ahead as fears of a world recession start to recede.

But, it is China that is now needed to really cement this positive picture. Beijing spent most of last year slowing Chinese growth with tighter monetary policy to prevent the economy from overheating and inflation from getting out of hand.

The wobble in commodity markets, particularly gold, amid concerns about the euro zone’s prospects, once again throws to the fore the relationship between commodities and economic trends over the past five years or so.

Here’s the problem: to what extent are commodity prices reflecting fundamental demand as opposed to speculative buying?

This matters.

Because if fundamentals are driving commodities then, in the absence of supply shocks, they should provide a decent barometer of where the global economy is heading. If that’s the case, the recent weakening of prices suggests a moderate global slowdown but nothing catastrophic.

But what if commodities are being driven by something else, by say financial market considerations, like central bank liquidity and fears of an ultimately inflationary outcome to all the quantitative easing being forced into the system?

The Swiss National Bank was wise to delay any decision on raising its peg for the euro against the Swiss franc.

With the Swiss economy sliding rapidly into recession and with deflationary pressures on the rampage, the central bank is under heavy pressure to move sooner rather than later.

But, with the euro zone debt crisis moving into a new and more dangerous phase and with the euro itself now starting to tumble, the SNB may yet find it has a much bigger battle on its hands.

By preserving the status quo and keeping the market guessing a little longer, the central bank should have a better chance of achieving its currency goals in the longer term. Since its unexpected decision in September to defend a euro floor at CHF1.20, the SNB has probably surprised itself as well as everyone else by its spectacular success.

The bank has had to spend minimal amounts on intervention since then, with its verbal warnings and speculation that the floor could be lifted to CHF1.25 lifting the euro all the way up CHF1.24. As economic data has deteriorated in recent weeks, and the need for a weaker Swiss franc has become even more imperative, the SNB has been keen to encourage speculation that the euro floor will be lifted at some stage.

U.K. trade figures were stunningly good Friday, with a record rise in exports leading to the biggest fall in the goods trade deficit ever published. But analysts were quick to pour cold water on any hopes the country is set for a rapid export-led recovery.

“These figures are a bolt from the blue and completely at odds with recent trends in the wider economy,” said Nida Ali, economist at forecasters the Ernst & Young Item Club. “We would be very wary of relying on this data to draw any firm conclusions about the outlook.”

Three points put the fall in the deficit in context.

First, it comes after a rise in imports in September blew that month’s deficit out to a record £10.2 billion. October’s drop returns the deficit to more normal levels: it was last this low in April.

With no concrete solution to the euro crisis in sight, German companies like builder Hochtief and engine maker Tognum are taking steps to improve liquidity as a potential buffer should the bloc’s financial crisis continue to deepen.

Hochtief is seeking to extend existing credit lines as a protective measure, a spokesman said Wednesday.

“We are extending credit lines early, should conditions in capital markets worsen due to the euro-zone crisis,” the spokesman said.

A number of investors and bankers have indicated that companies are hoarding liquidity and refraining from making acquisitions to strengthen their internal financing, rather than turning to banks. Commerzbank and Deutsche Bank said recently they would be keen to lend more money to medium-sized companies, but the demand is lacking.

Fund management company DWS finds companies’ housekeeping admirable, and said this week that corporate bonds are “the better sovereign bonds.”

Triggered by hopes of a comprehensive euro-zone deal and fresh central bank liquidity, equity markets have taken off this week.

But these measures are largely designed to prevent the sovereign debt infection from bringing down Italy and, therefore, the currency union. What happens to where the infection first flared up: Greece?

The upward trend in Greek yields even as they’ve dropped for every other crisis-hit euro-zone country suggests Greece remains more or less where it was before contagion caught hold across the single-currency region. The market says Greece will still default on its debt, and with private-sector creditors taking an even bigger loss than had been factored in by the latest EU deal.

There is no let-up to austerity. A semi-permanent state of austerity, GDP contraction, government deficits and lack of access to the credit markets will only feed popular resentment among Greeks towards the EU.

The only real alternative is for Germany and France to fully absorb a Greek default, including losses on debt held by the ECB, and to show willingness to a slower Greek economic restructuring, less austerity and more forbearance on Greek deficits.